Economic Crisis in Europe

Brief Explanation of the Case

One of France's largest banks affected by European debt crisis

  • Lost access to short-term debt markets

May be declaring bankruptcy

Needs support from International Monetary Fund

Bigger Concept

Affects all of the Eurozone

Unable to repay their government debt or bail European banks drowning in debt

Needed the support of third parties, European Central Bank and the International Monetary Fund

Causes

  • States assuming private debt burdens and socializing losses
  • Failure to obey Maastricht Treaty
  • Sovereigns hide their debt levels
  • Greek debt of $400 million

Consequences

UK didn't accept Angela Merkel's treaty

  • Fear of a "two-tier" EU

Forced to agree to cutbacks on spending

  • Slow their economic growth

Creation of the Eurobond

  • Increase on U.S. interest rates

Proposed Solutions

European Fiscal Union

  • Give European integration a central body
  • Increased control over budgets of states

European Bank Recovery

  • European Commission approved €4.5 trillion for state aid
  • Adopted legislative proposal to recover the banks and manage bank failure

European Safe Bonds and Eurobonds

  • Union wide safe asset without joint liability
  • Provided by 17 states

European Monetary Fund

  • Fixed interest rate Eurobonds
  • Banks not profiting from the ECB

Impact on THE US

  • Bank borrowing costs, exchange rates, trade and credit spreads
  • Decline of government bonds
  • Future reduction in economic growth

Greece

  • Low interest rates and increasing debt
  • 2010: Bondholders selling off Greek debt
  • Three-year €110 billion loan
  • Rescue package
  • European Financial Stability Facility

Ireland

  • Assuring the 6 main Irish-based banks
  • National Asset Management Agency
  • Rise in unemployment
  • Shortage in national budget

Portugal

  • Inflation of top management bonuses and wages
  • Below average productivity, outdated legal structure, strict labor market regulations
  • $116 billion bailout

Spain

  • Bank bailouts
  • €59 billion in additional capital
  • Balanced budget
  • 27% unemployment and economy shrinking by 1.4%

Italy

  • Rising borrowing costs
  • Austerity package
  • Too expensive to bail out

U.S. Proposed Solutions

Timothy Geithner, former U.S. Secretary of Treasury

  • Get ahead of their banking issues

ControversY

Break-up of the Eurozone

  • Problem with euro currency system
  • Proposed that Greece leave the Eurozone unilaterally
  • Expensive proposition
  • Instability in the system

Effects of Brexit leaving the EU

  • The British economy
  • Shock felt more powerfully in Europe than in Britain
  • Effectiveness of the euro?
  • Other countries on Brexit

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